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Gaining ground in a growing market: WJ Grain a force in FSU

April 01, 2004
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by Emily Buckley

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Within 15 short years, the WJ companies have grown to be leading traders and processors of grains and oilseeds in the Commonwealth of Independent States (CIS), made up of the 12 Former Soviet Union (FSU) countries. WJ traded 3.65 million tonnes of grain in 2002-03, falling second only to Glencore Grain in the amount exported from FSU countries last year.

Between its trading operations, four sunflower seed crushing plants, flour mill and operation of export elevators in both Russia and Ukraine, WJ saw a U.S.$435 million turnover in 2003. With operations across Moldova, Russia and Ukraine, WJ has positioned itself well to capitalize on the booming foods market and the predicted impending surge of grain production in FSU countries.

Out of the Iron Curtain
Joseph Vays, president of WJ, launched in 1989 the first WJ company — WJ Export-Import, Inc. — with his long-time friend Yuri Drukker one year after they emigrated to the United States from their home country of Ukraine. They focused on trading with the region they knew best.

The timing was opportune: the fall of communism in 1989 left the markets in Former Soviet Union countries wide open. They began doing business with the company Vays left in Ukraine, the Union of Cooperatives, which sourced, processed and distributed various agricultural products from farmers.

Although Vays had worked 20 years with the Union, it lent very little experience to doing business on a global scale because, at the time, all trading operations in FSU countries went through Moscow.

But being the first company entering the Ukrainian market gave WJ an advantage. Unfamiliar with international trading, the FSU region initially conducted much business on a barter system. The company’s first contracts, placed in April 1990, consisted of buying sunflower seeds and other Ukrainian agricultural products and selling them on international markets. "We had six months to deliver garments and electronics against that," Vays said.

By the next year, WJ was loading its first vessel to export 1,800 tonnes of sunflower seeds out of the Kherson, Ukraine port elevator. In the same year, it started selling grains to top international trading companies, including Louis Dreyfus, Glencore and Soufflet on an f.o.b. basis.

These relationships gave the company great insight into the industry, although there was definitely a learning curve on maneuvering the international trading buisness. Vays recalls paying brokers 2% commission per contract, which was nearly U.S.$6 or U.S.$7 tonne; the company now pays brokers the industry standard, typically U.S.$1 per tonne or less.

In order to expand the business, WJ established a company headquartered in Budapest, WJ Grain. Each year since its inception, WJ’s trading volumes have increased, rising from 12,000 tonnes in 1990-91 to 650,000 tonnes in 1995-96 to 3.65 million tonnes in 2002-03.

Expanding operations
In 1996, the company decided to expand and diversify its operations beyond grain trading. WJ has grown each year since with acquisitions of storage facilities, port elevators and crushing plants.

WJ’s two other working shareholders helped guide this growth process. WJ’s chief financial officer, David Holpert, guided the finances and restructuring using his experience as an attorney (based in Chicago, Illinois, U.S.) and as deputy managing director of the banking group ABN AMRO’s Russian subsidiary. Drukker, vice-president and head of processing for WJ, guided the acquisition and remodeling of processing plants and storage facilities. Drukker is based in New York City along with Vays, who is head of grain trading and silo activities for the company.

Vays also attributes some of the company’s successful growth to two employees. The first is Nikolay Kompanetz, a former Minister of Cereal Products in Ukraine who joined WJ in 1993 as general manager of grain operations. (Kompanetz is also currently the president of the Ukrainian grain association.)

The second is Daniel Marx, who joined WJ Grain in 1998, bringing with him years of experience as Soufflet’s chief trader. Marx now runs WJ Grain’s chief trading office out of Paris; back office operations are headquartered out of Budapest, Hungary and run by Mihaly Otvos.

Most of the WJ’s operations are concentrated in Moldova, Ukraine and Russia, although WJ has added offices in all the major grain producing regions and all major ports in the CIS.

Capital improvement projects have been ongoing at each facility acquired. "When we purchased these facilities, most of them had not been kept up or modernized over the course of their life under Soviet control," Vays said. "There is still a great deal of work to do at all of them."

In Russia, WJ has the second-largest ownership share of the Novorossiysk port grain terminal, the only deep-water port in Russia. To meet exporting needs, it financed a project in 1994-95 to upgrade ship loading capacity, making it possible to load Panamax vessels with up to 50,000 to 60,000 tonnes capacity. The group also manages three other storage facilities in Russia with total maximum capacity of 115,000 tonnes.

In Moldova, it owns four storage facilities, with total capacity of 97,000 tonnes.

Ukraine is home to one of WJ’s flagship assets. Since it purchased the port elevator terminal and mill in Kherson, Ukraine in 1997, WJ has doubled the storage capacity to 100,000 tonnes of storage for grain. By 2005, construction of an additional 40,000 tonnes of grain storage should be complete, as well as 20,000 tonnes of storage capacity for bulk oil export.

WJ will soon be installing an automated bin management system to monitor operations. Vays said this is important to maintain quality standards for international buyers, but he also noted that as a pioneer in this region, WJ must continue to integrate new technologies. A project is also underway to increase ship loading capacity to 1,000 tonnes per hour.

The Kherson elevator’s on-site flour mill has a daily grinding capacity of 410 tonnes of wheat. The mill was quite successful in the Soviet era when much wheat was imported. Wheat coming into the Kherson elevator would be milled and distributed throughout the country. Now, overcapacity in the region has caused the mill to run at around 45% capacity. This year, however, capacity jumped to nearly 80%, due in large part to the fact that the mill gained additional markets as local mills had difficulty sourcing raw materials during the low wheat harvest in 2003-04. WJ, which was one of the main importers of grain into Ukraine this year, was easily able to keep the Kherson mill supplied.

Crushing operations
Within the past five years, WJ has acquired four oilseed crushing facilities, two in Russia and two in Moldova. In total, the four plants processed nearly 270,000 tonnes of oilseeds in 2002-03. Today, combined capacity of the WJ crushing facilities totals 450,000 tonnes of oilseeds (primarily sunflower seeds) per year.

WJ’s Valuyski, Russia facility refines 220 tonnes of sunflower oil per day, and an upgraded bottling line produces up to 7 million 1-liter bottles per month with the brand names Razdolye and Milora.

In Moldova, the company acquired Floarea Soarelui (formerly known as the Beltz Fat and Oil Plant). Upgrades to the plant bumped refining capability to 140 tonnes per day, and a new bottling line can crank out 4 million bottles a month. The finished brands (Floris, Mister Cook and Aroma Soarelui) are marketed across the FSU, WJ said.

"We will further increase refining and bottling capacity at Floarea and eventually target the Balkan and west European markets with our brands," Drukker said.

WJ has also begun crushing soybeans at its facilities. "The decision to crush soybeans at some of our facilities was made due to the large demand for soy meal by local animal feed industries," Drukker said.

WJ does not have crushing plants in Ukraine. "We are looking for opportunities to build crushing plants in Ukraine, but in the meantime will originate oil for our new export facility at Kherson from existing local plants," said Drukker, who sees an export market in North Africa and Europe. "There is no subsidy for sunflower seed production in Europe, so more oil will be imported."

Into the future
Improving operations in logistics, exports and processing are the top goals for the WJ Group as it begins to look ahead at its next 15 years.

"The challenge is now for us to make the operations we now have as profitable as possible," Vays said, summing up the company’s biggest needs as more capital, more cash flow and continued facility improvements.

WJ is getting some cash flow assistance from the European Bank of Reconstruction and Development (EBRD), which jointly with Agroindbank lent U.S.$12 million to assist with purchasing sunflower seeds for WJ’s crushing plants in Moldova.

"We hope to increase these amounts this year and expand the financing for Russia and Ukraine," said David Holpert. "So far we have financed our long-term projects using our own funds. However, we hope to be able to attract the attention of the various financial institutions to start to participate in our long-term projects as well."

Vays also sees additional storage as key to capitalizing on the grain production increases in this region. "We need to purchase or lease more silos to keep goods locally and to buy more grains and oilseeds at harvest time, allowing more exports and processing facilities to run at higher capacities."

For WJ’s grain trading business, Vays said the keys will be continuing to originate product directly from producers, finding niche markets, improving logistics and increasing the recognition of the WJ Grain name in global trade markets.

On the processing side, WJ plans to increase oil brand recognition and break into new markets. Currently, WJ processes 11 million bottles of oil per month— but it hopes to nearly double that to 22 million by the end of 2004 to meet ever increasing demand in the FSU region.

And where will the next 15 years lead WJ? "It can be very interesting," Vays said. "We see our company will still be an originator and exporter of goods. We believe more goods will be processed under more brands and with better quality, and we’re always open to new opportunities and to working with new partners."